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Gary Outdoor Advertising Co. v. Sun Lodge, Inc.

Arizona Supreme Court
650 P.2d 1222, 133 Ariz. 240 (1982)
ELI5:

Rule of Law:

A liquidated damages clause that requires payment of the full remaining contract price upon breach, without accounting for the non-breaching party's duty to mitigate damages or for expenses saved, is an unenforceable penalty. While such a clause is void, the non-breaching party may still recover its actual proven damages.


Facts:

  • In July and August 1977, Gary Outdoor Advertising entered into two contracts with Sun Lodge, Inc. to lease two outdoor advertising signs for a 36-month period.
  • Rex E. Bishop signed the contracts on behalf of Sun Lodge as its President.
  • The contracts contained a clause stating that a person signing on behalf of a corporation would be personally liable.
  • The contracts also included a provision that if Sun Lodge defaulted on payments for two successive months, Gary Outdoor Advertising could discontinue service, and the entire remaining rental for the term would become immediately due as liquidated damages.
  • This damages clause did not require Gary Outdoor Advertising to mitigate its damages by re-letting the signs or provide any offset for its saved maintenance costs.
  • In January 1978, Sun Lodge defaulted on its monthly payments.
  • Following the default, Gary Outdoor Advertising re-let one sign in February 1978 and sold both signs in August 1978, well before the 36-month contract terms expired.

Procedural Posture:

  • Gary Outdoor Advertising filed suit against Sun Lodge, Inc. and its president, Rex E. Bishop, in the trial court.
  • The trial court granted partial summary judgment for Gary Outdoor Advertising, ruling that the Bishops were personally liable for any damages that might be determined at trial.
  • A default was entered against the corporate defendant, Sun Lodge, Inc.
  • After a trial on the merits, the trial court entered judgment in favor of the Bishops and against Gary Outdoor Advertising.
  • Gary Outdoor Advertising, as appellant, appealed the trial court's judgment to this intermediate appellate court.

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Issue:

Is a contract's liquidated damages clause, which requires a defaulting party to pay the full remaining contract price without any reduction for the non-breaching party's saved expenses or mitigated damages, an unenforceable penalty?


Opinions:

Majority - Shelley, J.

Yes, a liquidated damages clause that requires a defaulting party to pay the full remaining contract price without any reduction for the non-breaching party's saved expenses or mitigated damages is an unenforceable penalty. The provision at issue allows the appellant to recover more than it would have received had the contract been fully performed, as it is relieved of its own costs of maintenance and is free to re-let the space for additional profit while still collecting the full original contract price. This has no reasonable relation to actual damages and is therefore penal in nature. While the trial court incorrectly reasoned that the entire contract was void due to an unenforceable statute of limitations waiver, it reached the correct result. The penalty clause is severable and unenforceable, but the remainder of the contract is valid, permitting the appellant to recover its actual damages. However, the appellant failed to present any evidence at trial to prove the amount of its actual damages, instead relying solely on the unenforceable penalty clause. For this failure of proof, an award in the appellant's favor would be improper.



Analysis:

This decision reinforces the common law distinction between enforceable liquidated damages and unenforceable penalties. It clarifies that courts will look to the substance of a damages clause, not merely its label, to determine if it is a reasonable forecast of actual damages or a punitive measure. The case establishes that an acceleration clause granting the full contract price without a duty to mitigate is inherently punitive. It also serves as a crucial reminder that if a liquidated damages clause is struck down, the burden shifts back to the plaintiff to prove actual damages, and a failure to do so can be fatal to their recovery.

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